How Much Could a $5,000 Credit Card Balance Cost You Over Time?

If you use a credit card, it's a good idea to pay your balance in full when the statement comes to you. This will enable you to avoid paying credit card interest.

With the Federal Reserve reporting the average commercial bank interest rate on all credit card accounts was 20.09% as of February 2023, avoiding interest is especially important, as this is a very high rate to pay.

But what if you don't have enough money in your savings account to pay off your bill? It's important to understand the potential costs you could incur. For example, if you had a $5,000 credit card balance, here's how big of a price you might end up paying.

The cost of a $5,000 credit card balance could shock you

If you have a $5,000 credit card balance, your minimum payment equals 2% of your balance, and your interest rate is 20.09%, it would take 677 months for your entire credit card balance to be repaid. That's 56 years -- nearly double the amount of time it takes the typical home buyer to pay off their mortgage loan in full.

During the 56 years that you would be paying off your debt, you would incur a ton of interest charges. Specifically, you would pay $22,126.31 in interest on your $5,000 balance -- nearly five times the amount that you actually charged on your account in the first place.

This seems like an astronomical sum of money, and it is. It also seems like a huge amount of time to be stuck in debt for purchases you made on a card that you almost assuredly will not still be enjoying 56 years from now. And it is.

How minimum payments keep you in debt

If you're wondering how this can happen, it's because the minimum payment on a credit card is absolutely not designed to help ensure you get out of debt in a timely manner. The minimum payment is very low to keep you in debt and to enrich creditors with your interest costs. With a minimum payment equal to just 2% of your card balance (a common amount) and an interest rate that high, the bulk of your payment will go to interest every month.

When you pay a lot of money toward interest and only a very tiny amount toward reducing your balance, you never actually make much progress on paying off your debt. Your first payment, for example, would be $100 -- $83.33 of which would go to interest and just $16.67 of which would actually reduce what you owe. And this would keep going for almost your entire payoff period, because your balance would remain high even while you make payment after payment.

How to reduce your borrowing costs

If you don't want this to happen to you, there's a simple way to avoid it: You need to pay more than the minimum. Every extra dollar you send in can go directly toward reducing your principal balance so you'll actually make progress in paying off your balance. As your balance goes down, interest costs will also decline along with it.

So do whatever you can to pay more than the minimum on your credit card balance. Otherwise, you could be dealing with credit card payments for a long, long time.